Bearish wagers on the Powershares QQQ Trust cost the most
since September 2012 relative to bullish ones, data compiled by
Bloomberg show. The Nasdaq 100 reached a 14-year high, buoyed
this year by rallies in companies from software maker Microsoft
Corp. to social-networking site Facebook Inc.

Investors are hedging against a potential retreat after
embracing technology stocks amid bets that corporate spending
will pick up and new gadgets will lure consumers. More than $1.1
billion went into the Powershares QQQ fund on Aug. 19, the most
since December 2011, according to data compiled by Bloomberg.
The Nasdaq 100 now trades at an almost four-year high compared
with the Standard & Poor’s 500 Index.

“People have seen big gains in names like Microsoft and
Intel, and they want to protect those gains, especially since
they’ve seen bumps and bruises along the way,” Barry James, who
helps oversee $5.5 billion as president of James Investment
Research Inc. in Xenia, Ohio, said by telephone. “Tech isn’t
cheap today. If we get a correction in the overall market, the
sector may be more vulnerable.”

Weak Confidence

Weakening consumer confidence usually correlates with
selling in technology shares, James added. A preliminary reading
of the Thomson Reuters/University of Michigan index showed last
week that American consumer sentiment fell this month to the
lowest level since November. The gauge is at its lowest level
ever versus the Nasdaq 100, according to data going back to
1985.

The technology index has advanced for the past seven days,
reaching its highest level since Sept. 1, 2000. It remains 14
percent below the all-time high from March of that year, before
it plunged more than 30 percent each year through 2002 as the
Internet bubble burst.

This year’s 13 percent rally sent the Nasdaq 100 valuation
to 23.1 times reported profits, compared with 17.8 for the S&P
500, data compiled by Bloomberg show. It’s at its highest level
since September 2010 relative to the broader stocks index.

Too Far

While the Nasdaq 100 climbed, the cost of hedging also rose
as investors sought to protect gains after a selloff earlier
this year. Concern that Internet and biotechnology companies
rallied too far spurred a 7.5 percent slump in the index from
March 5 through April 11. Netflix Inc., whose shares almost
quadrupled last year, tumbled 28 percent during that period,
while Facebook sank 18 percent after more than doubling in 2013.

Contracts hedging against a 5 percent decline in QQQ, the
biggest exchange-traded fund tracking technology companies, cost
4.2 points more than calls to buy, according to three-month
implied-volatility data compiled by Bloomberg. The price
difference increased to an almost two-year high of 4.5 points on
Aug. 5.

Even as tech shares have become more expensive, bigger
companies such as Hewlett-Packard Co. trade at attractive
valuations, have high levels of cash and pay good dividends,
according to Nick Skiming of Ashburton Ltd. Shares of the PC
maker are valued at 11.6 times reported profit, 50 percent lower
than the multiple for the Nasdaq 100, data compiled by Bloomberg
show.

Improvement Signs

The PC market has shown signs of improvement this year
after Hewlett-Packard reported quarterly revenue that exceeded
analysts’ estimates and chipmaker Intel Corp. forecast third-quarter sales that topped projections. Intel trades at 17.4
times earnings.

“Investors are returning to the blue chips after not being
able to find the performance from the more speculative end of
technology,” said Skiming, who helps manage $10 billion at
Ashburton in Jersey, Channel Islands. “There’s been a focus on
returning capital to shareholders through dividends and
buybacks.”

Shares of Apple Inc., which has the highest weighting in
the Nasdaq 100, surpassed a 2012 record this week as investors
looked ahead to new products such as bigger-screen iPhones and a
wristwatch-like device that may jump-start revenue growth. Apple
is also returning $130 billion back to investors through
buybacks and dividends. The stock trades at 16.2 times profit.

Earnings Estimates

Earnings at companies in the Nasdaq 100 will jump 24
percent in 2014, the fastest rate of growth since 2011,
according analysts’ estimates compiled by Bloomberg. That
compares with an 11 percent growth for S&P 500 stocks.

Of the five most-owned options, four are hedging against a
decline. Puts wagering on a slide to $89.63 by January had the
largest open interest, followed by contracts calling for a drop
to $90.63 next month.

Low levels of volatility on the Nasdaq 100 have made the
cost of protection attractive to investors, according to Stephen
Solaka of Belmont Capital Group. The Chicago Board Options
Exchange NDX Volatility Index, measuring the cost of options on
the tech gauge, has fallen 19 percent this year to 12.55 at
10:42 a.m. in New York today. The CBOE Volatility Index, which
tracks S&P 500 derivatives costs, has retreated 12 percent in
2014 to 12.05.

“You have a market near all-time highs and protection is
not that expensive,” Solaka, a managing partner at the Los
Angeles-based investment firm, said by phone. “Given the recent
selloff and snapback, it’s not that surprising people want to
lock in gains. When volatility is lower, there’s put demand.”